Advertising disclosure: This article is published by Best Rate Loan LLC, a licensed Michigan mortgage broker (NMLS #2075205), and is advertising. It is not an independent review, ranking, or comparison, and it is not financial, tax, or legal advice. We have a financial interest in the products discussed. Information is general and for educational purposes only; it is not an offer of credit or a commitment to lend. Rates, programs and program terms change without notice.
Have you taken out a home loan with a down payment of 20% or less? If yes, you may have been introduced to PMI. As a first-time home buyer in Michigan, you may have many questions. What is PMI? What is PMI mortgage? Read on to find out.
What is PMI?
PMI stands for private mortgage insurance. PMI is additional insurance that lenders and banks may require you to buy if you take out a home loan that is over 80% of your home’s value. Note that the cost of private mortgage insurance is based on the total loan amount and your creditworthiness. Did you know that PMI can be easily arranged by your lender and provided by a private insurance company?
Here is an example. If your Michigan home is appraised at about $200,000 and your current mortgage balance is over $160,000, you will likely have to carry – and pay for – private mortgage insurance. While PMI provides coverage for the lender or bank only, as a homeowner, you will have to pay the premiums. It is worth noting that, like other insurance policies, PMI comes with a yearly premium and usually an upfront premium.
How does PMI work?
Similar to other types of insurance policies, you will have to pay premiums in order to cover damages should an unfortunate or hazardous event occur. Keep in mind that PMI protects the lender, not you: if a borrower defaults, the insurer reimburses part of the lender’s loss. It does not pay off your loan.
You have to pay PMI monthly, in addition to your interest, principal, taxes, as well as homeowner’s insurance. You will be glad to know that PMI is not permanent—it may be dropped once you pay down enough of your mortgage’s principal.
You can ask your servicer to cancel PMI once your balance reaches 80% of the home’s original value. Under the federal Homeowners Protection Act, PMI on most conventional loans also ends automatically when your balance is scheduled to reach 78% of the original value, as long as you are current on your payments. Your mortgage provider may have a procedure to confirm the equity has been met and then once they confirm that, they will exclude the PMI from your monthly payments.
When do I need PMI?
Note that PMI helps minimize the risk for lenders and banks to offer home loans to borrowers who cannot come up with a 20% down payment and have less equity in the homes. You should know that this equity helps pay the loan balance if you default on your loan and go into home foreclosure.
Your lender or bank requires you to carry PMI so that if you can no longer make timely payments on your Michigan home, your lender will still receive payments (via the private insurance policy).
As you can see, PMI essentially safeguards your lender if you default on your loan. And PMI doesn’t protect you, the borrower, in the event you fall behind on the mortgage payment.
How do I get Rid of PMI on My Mortgage?
For conventional loans, if you can put down 20% or more when you purchase a home in Michigan, you can usually avoid paying for PMI. The other way you can get rid of paying PMI on your mortgage is to request your mortgage servicer for a removal, provided you can prove that the equity in your home equals or exceeds 20 percent of the current market value of your home. If it’s close, your mortgage servicer may require an appraisal to assess the home value.
You can also avoid PMI if you make significant improvements to your Michigan home. For instance, if you have made home improvements that significantly increase your home’s value, you can have private mortgage insurance removed provided you can prove that the improvements add value to your home and take you to the minimum 20% equity in your home. Again, if it’s close, this scenario may also require an appraisal.
Can I Cancel PMI if my Home Value Increases?
Keep in mind that lenders determine if your Michigan home’s value has sufficiently increased with an appraisal. Remember that a licensed appraiser will walk through your home and compare it to recent home sales in your area in order to arrive at a value.
Remember that because an insufficient home value may cause your bank or lender to deny the PMI cancellation request, it is vital to get a ballpark value before you pay for a property appraisal in order to determine if you have a good shot.
How Much is PMI Monthly?
It is worth noting that PMI premiums can vary considerably depending on the insurance company. However, these premiums are often based on many factors like the type of mortgage loan as well as the loan amount—usually, the lower your credit score and the lower your down payment, the higher the premiums.
In most cases, the premiums for private mortgage insurance can range from $30 to $70 a month for every $100,000 that you borrow. This means that if you purchased a home with a value of about $300,000, you might pay about $150 each month for PMI.
Should I Put 20% Down or Pay PMI?
Whenever you put less than 20 percent down on a home, you will have to pay for private mortgage insurance until you reach 20% equity. One of the main advantages of not putting down 20% is that you can free up your cash, and you can use that cash toward other things.
For example, if you’re purchasing a fixer-upper, note that making a small down payment will allow you to use the cash for repairs or renovations to your home.
Final Thoughts
Private mortgage insurance can be an expensive necessity for many Michigan homebuyers who do not have sufficient money saved for a 20 percent down payment. Are you looking to avoid PMI on your first home purchase? You will be happy to know that there are many methods to do that.
If you would like to find out more about private mortgage insurance, contact a home loan expert. You can trust so that you can make the right decision. They will go over all of your options so that you can choose the right loan.
This article is general educational information, not advice, and not an offer of credit or a commitment to lend. Mortgage rates, loan programs, down payment assistance program terms, and tax rules change frequently, and the information here reflects our understanding as of the last review date shown above. Verify current program terms with a licensed mortgage loan originator before making a decision. Best Rate Loan LLC does not provide tax, legal or accounting advice.
